Conclusion of a contract for the publication of a mobile game in China. What to pay attention to

About the pitfalls when working with Chinese game publishers, — she told in her column for App2Top.ru Svetlana Gordey, a leading lawyer of the REVERA legal group.

Svetlana Gordey

The Chinese market has a number of its own regulatory features. The first thing that teams planning to enter a new market face is the current legal regulation, which does not allow foreign companies to distribute their products in China independently. Foreign companies (including foreign publishers) must either register their own office in China, or look for a local partner (Chinese publisher) and enter the market through it.

As a rule, foreign companies choose the second option, signing contracts for the publication of mobile games with local publishers. Below we will consider a number of conditions that you should pay attention to when concluding an agreement with a Chinese publisher.

1) What can a Chinese publisher do with a mobile game?

As a rule, the developer grants permission to use a mobile game based on an exclusive license. The exclusive license assumes that only the Chinese publisher can use the mobile game to the extent that it is provided under the contract.

The situation from practice: the copyright holder has provided a local publisher with the opportunity to distribute, advertise, promote, publish and otherwise use a mobile game on the territory of Mainland China for 1 year (under an exclusive license). Due to such an unlimited list of ways to use the copyright holder completely lost the opportunity to do anything with a mobile game on the territory of Mainland China and within 1 year he had to work with only one publisher.

In practice, when agreeing on such contracts, it turns out that developers and publishers are not always ready to work under such broad restrictive conditions. In this case, it is important to determine what a Chinese publisher should not do with a mobile game. For example, you would like to leave only the possibility to localize the game, but without any other changes and modifications. In this case, it is important to limit the right to change the mobile game exclusively to the possibility of localization of the game.

If you are a foreign publisher who obtained the rights to a mobile game under an exclusive license from the developer, and you work in the Chinese market through a Chinese publisher partner, it is important that the ways of using the game from the contract with your local partner are not wider than what the developer provided you under the contract.

2) Where will the partner publish the mobile game?

In the context of entering the Chinese market, it is important to understand that there are some features of the territorial structure in the country. In practice , you can find such options for determining the territory of the publication in the contract:

People’s Republic of China, China. The official name of the state is People’s Republic of China, which includes the whole of China, including the special administrative regions of Hong Kong and Macau (Taiwan, a partially recognized state, is a disputed territory). The official name or simply China in contracts is quite rare;
Mainland China or Greater China. The most common option is Mainland China. This is the continental part of China, which does not include the territories of Hong Kong, Macao and Taiwan, and is often prescribed in the contract “… the territory of Mainland China (Hong Kong, Macao and Taiwan are not included) …“. If the distribution area of the game includes Hong Kong, Macau and Taiwan, then the term Greater China can be used.

The definition of the territory of the publication is important from the point of view of which territories the income from the mobile game will come from. If the entire territory of China is defined in the contract, it is worth discussing with the local publisher its plans for publication in the territories of special administrative regions (in the absence of such plans, these areas should be explicitly excluded).

For foreign publishers entering the Chinese market and who have received the rights to a mobile game from the developer on the basis of a license, it is necessary to ensure that the territory to which you give the opportunity to publish a mobile game to a Chinese partner does not go beyond the territory specified in the contract with the developer.

3) Now we count the money. How will we share with a partner?

In order for the procedure for calculating your share not to come as a surprise to you, we recommend paying attention to the following aspects:

a) The basis for calculating royalties. The one from which the copyright holder’s share is calculated. There are two possible options:

the percentage of royalties is calculated from all income (it is rare and applicable if the Chinese publisher independently chose such a model);
the percentage of royalties is calculated from net profit (income less expenses).

In China, income is usually easiest to get from advertising. Gross income can be generated both at the expense of any income without restrictions, and at the expense of only a certain category of income. If the income is generated only through advertising, it is important to discuss with the publisher the possibility of including other types of income (for example, income from in-game purchases).

b) Expenses deducted from gross income. Expenses reduce the basis for calculating the copyright holder’s share, respectively, the more expenses are deducted from gross income, the less the amount of money received by the developer will be.

Do not forget that the list of expenses can be either closed (with a fixed list) or open (formed every month at the discretion of the publisher). In the second case, the expenses will be unlimited, which may lead to an uncontrolled decrease in the base for calculating royalties.

The situation from practice: the publication contract stipulates that advertising expenses and other operating expenses incurred by the publisher in connection with the game are deducted from gross income. Such a broad formulation allows the publisher to include in expenses everything that he will attribute to operational expenses at his discretion.

We recommend either fixing a specific list of expenses directly in the contract, which reduce the base for calculating royalties, or establishing the publisher’s obligation to coordinate such expenses with the copyright holder in advance.

4) Can I control financial flows?

For transparency of the publisher’s actions, various reporting and control mechanisms can be fixed in the contract, for example:

a) Providing access to advertising indicators. Access to advertising and marketing information (various indicators and metrics) allows you to make timely conclusions about the prospects and, if necessary, react and change something. Such information can be transmitted either in the form of a report or by providing access to various accounts.

b) Providing reports with all information on receipts and expenditures. The main mechanism for controlling the formation of financial flows is the provision of reports with all information about gross income, expenses incurred and the calculation of net income. At the same time, describing the publisher’s obligation to provide reporting, it is also important to fix clear deadlines for providing such information and working out objections to it, especially if the possibility of payment is tied to the time of acceptance of the report.

In addition, do not forget about the language of reports, so that you do not have to use machine translation or even involve a translator.

c) Conducting an audit. Another control mechanism is the ability to audit documentation on the formation and accounting of financial flows. As a rule, an audit involves the involvement of professional auditors and can be quite expensive. When agreeing on such conditions, we recommend determining the frequency of audits, as well as the consequences of detecting discrepancies (for example, compensation of this difference by the publisher if it occurred through his fault).

5) How long have we been cooperating and can I withdraw from the contract?

In practice, long-term contracts for the publication of mobile games in China are quite rare. The publication can last from 3-6 months to 1 year. When agreeing on the release date of a mobile game, it is important:

evaluate the readiness to work with a local partner at the specified time. If this is your first interaction with a Chinese publisher, it is best to avoid too long publication dates if possible;
a foreign publisher should limit the period of publication in the Chinese market in such a way that it does not exceed the term of the license received from the developer.

Side by side with the term of partnership is the possibility of the parties to withdraw from the contract before the term of cooperation ends.

An example from practice: the parties have established that the publication of a mobile game in China will last 3 years. At the same time, the copyright holder had no opportunity to withdraw from the contract earlier than the specified period, except by agreement of the parties. At some point, the copyright holder was no longer satisfied with the income he receives from the Chinese market, and therefore he offered the partner to stop publishing and terminate the contract. The Chinese publisher did not want to terminate the contract by agreement of the parties, which is why the copyright holder had to enter into difficult negotiations with him.

The described situation might not have arisen if the copyright holder had the opportunity to freely withdraw from the contract. In practice, Chinese publishers are reluctant to make concessions in terms of agreeing such conditions. One of the options for a compromise condition is the establishment of additional objective constraints for withdrawal from the contract: prior notification in compliance with a certain deadline, the inability to withdraw from the contract for the first few months, etc.

In general, when entering the Chinese market, it is important to carefully approach the issue of choosing a local partner, since this is a highly competitive environment with its own rules and features. Not every publisher is ready to compromise in terms of edits to the contract, but we recommend trying to negotiate acceptable solutions. If the publisher does not make contact, it is necessary to weigh all the pros and cons and decide whether to continue interacting with such a partner.